ECON202: CH14
When economists say that the Federal Reserve Banks are central banks, it means that
the banks' policies are coordinated by the Federal Reserve Board of Governors.
When economists say that the Federal Reserve Banks are quasi-public banks, it means that
Federal Reserve Banks are a blend of private ownership and public control.
Assume that Jimmy Cash has $2,600 in his checking account at Folsom Bank and uses his checking account debit card to withdraw $260 of cash from the bank's ATM machine. By what dollar amount did the M1 money supply change as a result of this single, isolated transaction?
$0
Suppose that a small country currently has $4 million of currency in circulation, $6 million of checkable deposits, $200 million of savings deposits, $40 million of small-denominated time deposits, and $30 million of money market mutual fund deposits. From these numbers we see that this small country's M1 money supply is __________, while its M2 money supply is __________.
$10 million; $280 million
Which of the following is not a function of the Fed?
Advising Congress on fiscal policy
In the United States, who is responsible for maintaining money's purchasing power?
Board of Governors of the Federal Reserve System
What is the largest component of M1?
Checkable deposits
Which two of the following financial institutions offer checkable deposits included within the M1 money supply?
Commercial banks and Thrift instituitions
Which of the components of M1 is legal tender?
Currency
Which of the following items is (are) not included in either M1 or M2?
Currency held by banks and Money market mutual fund balances held by businesses
What are the components of the M1 money supply?
Currency in circulation and checkable deposits
How does the purchasing power of money relate to the price level?
It is inversely related to the price level.
Recall the formula that states that $V = 1/P, where V is the value of the dollar and P is the price level. If the price level falls from 1 to 0.75, what will happen to the value of the dollar?
It will rise by a third (33.3 percent).
What's bad about not having a unit of account?
Nobody knows what anything is worth.
What near-monies are included in the M2 money supply?
Noncheckable savings deposits, money market deposit accounts, small time deposits, and money market mutual fund balances
Why is the face value of a coin greater than its intrinsic value?
People would sell it for its intrinsic value
What determines the value (domestic purchasing power) of money?
People's willingness to accept it in exchange for goods and services
Suppose the central bank in the nation of Zook attempts to pay off its national debt by printing large amounts of currency. The large increase in the money supply causes the price level to rise by 500 percent. What do you expect will happen to the value of Zook's currency?
The value of Zook's currency will decrease by 80 percent.
What "backs" the money supply in the United States?
There is no concrete backing to the money supply in the United States.
What's bad about not having a medium of exchange?
To trade, you must find someone who wants exactly what you have, and has exactly what you want.
TARP is the
Troubled Asset Relief Program funded with general tax revenue and the issuance of government debt. Correct
Kids trade items in the school lunchroom. It is very difficult to find a pair of kids who each wants the others' food among hundreds of kids. So, the kids start trading their food away for YumPops (a popular snack that everyone will accept), and then trading the YumPops to other kids for the food they want. Since YumPops go bad after a couple hours, all are consumed by the end of the day. In this case, YumPops are serving the role of:
Unit of account and Medium of exchange
What's bad about not having a store of value?
You cannot save for a large purchase in the future.
Suppose the price level and value of the U.S. dollar in year 1 are 1 and $1, respectively. a. If the price level rises to 1.45 in year 2, what is the new value of the dollar? b. If, instead, the price level falls to 0.45, what is the value of the dollar?
a. $0.69 b. $2.22
Assume that the following asset values (in millions of dollars) exist in Ironmania: a. What is M1 in Ironmania? b. What is M2 in Ironmania?
a. $2340 b. $2980
Assume the value of a country's currency is 1 when the price level is 1. a. If the price level changes to 1.2, by how much in percentage terms will the value of the country's currency change? b. Now assume that the value of the country's currency is equal to 1 when the price level is 1.4. If the price level changes to 1.5, by how much in percentage terms will the value of the country's currency change?
a. -16.67 b. -6.67
Jane currently has $4,000 in her savings account and $2,000 in her checking account at the local bank. a. If Jane withdraws $500 in cash from her savings account, by what dollar amount will the country's money supply (M1 and M2) change as a result of Jane's actions? b. Suppose that after Jane withdraws $500 from her checking account, she uses $300 of this money to pay her federal income tax. After paying her taxes, Jane uses $120 to buy a set of used golf clubs from her neighbor, who then deposits the money into his checking account. Jane deposits the remaining cash from the $500 withdrawal into her savings account. By what dollar amount will the country's money supply change as a result of Jane's actions?
a. Change in M1: $500 Change in M2: $0 b. Change in M1: $-380 Change in M2: $-300
Suppose that Lady Gaga goes to Las Vegas to play poker and at the last minute her record company says it will reimburse her for 65 percent of any gambling losses that she incurs. a. Will Lady Gaga probably wager more or less as a result of the reimbursement offer? b. What economic concept does your answer illustrate?
a. more b. Moral hazard
Subprime mortgage loans were one of the factors that exacerbated the financial crisis of 2007-2008. These loans resulted in
an increase in demand for housing and a rapid, unsustainable increase in home prices
The Board of Governors of the Federal Reserve System
coordinates policies for the 12 Federal Reserve Banks.
The Wall Street Reform and Consumer Protection Act of 2010 tried to address some of the problems that helped cause the financial crisis of 2007-2008 by
giving the Federal Reserve broader authority to regulate all large financial institutions.
An important reason why members of the Federal Reserve's Board of Governors are each given extremely long, 14-year terms is to:
insulate members from political pressures that could result in inflation.
Other than its main role of controlling the supply of money, functions of the Federal Reserve include
issuing Federal Reserve Notes, providing for check collection, and supervising the operation of banks.
The three basic functions of money are
medium of exchange, unit of account, and store of value
The Federal Open Market Committee (FOMC) includes
members of the Board of Governors and 5 of the 12 presidents of the Federal Reserve Banks, of which the president of the New York Fed has a permanent voting seat.
City Bank is considering making a $50 million loan to a company named SheetOil that wants to commercialize a process for turning used blankets, pillowcases, and sheets into oil. This company's chances for success are dubious, but City Bank makes the loan anyway because it believes that the government will bail it out if SheetOil goes bankrupt and cannot repay the loan. City Bank's decision to make the loan has been affected by:
moral hazard
The financial crisis of 2007-2008 was exacerbated by subprime mortgage loans. These loans were made to borrowers
more likely to default on their loans.
Rapid inflation can undermine money's ability to perform its functions. During periods of runaway inflation,
people often revert to barter because money fails as a medium of exchange.
Each member of the Board of Governors of the Federal Reserve System is selected by
the U.S. president and confirmed by the Senate.
When economists say that the Federal Reserve Banks are bankers' banks, it means that
they perform the same functions for banks as banks perform for the public.
Mortgage-backed securities were one of the factors that exacerbated the financial crisis of 2007-2008 because
they reduced the risk exposure that banks faced after issuing subprime loans, and encouraged this type of lending.
Economists nearly uniformly support an independent Fed rather than one beholden directly to either the president or Congress because
this independence allows the Fed to more effectively control the money supply and maintain price stability.
During the financial crisis of 2007-2008, the Federal Reserve performed its role as "lender of last resort" by
using creative facilities to lend to financial institutions during this time.
The Federal Open Market Committee (FOMC)
votes on the Fed's monetary policy and directs the purchase or sale of government securities. Correct
